Sequester cuts near as Senate bills fail

Spending cuts start Friday; markets shrug off budget battle for now

WASHINGTON (MarketWatch) — Automatic federal budget cuts of $85 billion looked certain to kick in Friday after a pair of bills to replace them failed in the Senate on Thursday.

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Senate Majority Leader Harry Reid

Neither a Democratic nor a Republican bill aimed at replacing the so-called sequester was able to get enough support to win a test vote on Thursday.

While senators from both parties hadn’t expected passage, the bills represented a last-ditch legislative effort to replace the across-the-board cuts to domestic and military spending.

The Republican bill, which would have given President Barack Obama the opportunity to pick which cuts he’d make, garnered just 38 “yes” votes; the Democratic bill, which would have replaced the cuts with alternative spending cuts and tax hikes on the wealthy, received 51 “yes” votes; 60 were needed to cut off debate.

U.S. markets on Thursday shrugged off the budget drama in Washington, even as the White House and economists warned about the effects of the cuts. The Dow Jones Industrial Average
DJIA, -0.32%
lost 21 points, after coming within striking distance of its all-time closing high set in October 2007. See Market Snapshot.

Sequester 101: What does It mean?

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The spending cuts known as the sequester appear set to take effect Friday. Here’s what that means. Photo: AP

The budget cuts for fiscal 2013 would not take effect all at once on Friday. Instead, they would go into effect gradually through the end of the fiscal year on Sept. 30. In total, the sequester would cut about $1 trillion over nine years. Read full MarketWatch sequester coverage.

With a deep divide lingering in Washington over spending and taxes, focus was turning to a Friday meeting between Obama and congressional leaders about the automatic cuts. Obama and Democrats want to replace the sequester with a combination of alternative cuts and tax increases; Republicans want spending cuts only.

“Tomorrow I will bring together leaders from both parties to discuss a path forward,” Obama said in a statement late Thursday. “As a nation, we can’t keep lurching from one manufactured crisis to another. Middle-class families can’t keep paying the price for dysfunction in Washington.”

Senate leaders pointed fingers at one another ahead of the votes on Thursday.

“They want it to fail so they can go around the country blaming Republicans for something the president proposed,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said about Democrats and their proposal.

Senate Majority Leader Harry Reid, a Nevada Democrat, charged the Republicans with “punting,” and the White House said Obama would veto the GOP bill if it passed.

The Obama administration and lawmakers have warned of the impacts of the sequester on everything from air-traffic control to federal programs for the needy to big defense contractors.

Analysts liken the impact of the sequester to a “slow-motion train wreck” and say the effects will only be slowly felt. But there would be pain if they cuts are allowed to go through, they also warn: the Bipartisan Policy Center estimates that the sequester would cut U.S. growth by half a percentage point in 2013 and cost the economy about one million jobs over the next two years. Read: The sequester starts Friday. Then what?

Meanwhile, the congressional Budget Office said in a report published Thursday that the cuts for fiscal 2013 would actually total $42 billion, not the $85 billion cited by the White House. The lower number is due to the way the government arranges contracts, the nonpartisan CBO said.

“Acquiring major weapons systems and completing large construction projects, for example, can take several years,” CBO explained.

The sequester originated in the failure by Obama and House Speaker John Boehner in 2011 to achieve a “grand bargain” on taxes and spending. Designed to be so onerous that neither party would allow it to happen, the sequester was approved by both chambers of Congress and signed by Obama.

Republicans have been trumpeting reporting from the Washington Post’s Bob Woodward showing that the sequester was the White House’s idea and the administration has angrily fired back at Woodward. Read more on Political Watch blog.

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